[MUSIC] Let's switch gears now and talk a little bit about why an acre of land to build a house in rural Mississippi costs so much less than an acre of land in Carmel, California. And why an acre of farmland in Iowa costs so much more than an acre of farmland in New Mexico. So, here it goes. Thus far, we have assumed that all units of land are of the same grade. This is clearly not so. Different acres of land vary greatly in productivity. These productivity differences stem primarily from differences in soil fertility, and such climatic factors as rainfall and temperature. These factors explain why Iowa soil is well-suited to corn production, while the desert wasteland of New Mexico is incapable of corn production. These productivity differences will be reflected in resource demand. This figure illustrates the rent differentials that might arise from differences in the quality of land and its productivity. Suppose that only corn can be produced on four grades of land, each of which is available in the same fixed amount. When combined with identical amounts of capital, labour, and other cooperating resources, the productivity. Or more specifically the marginal revenue productivity, of each grade of land, is reflected in the demand curves, D1, D2, D3, and D4. With D1 being the most productive and D4 being the least productive. The resulting economic rents for grades one, two and three land will be R1, R2 and R3 respectively. While grade four land is so poor in quality that it would not pay farmers to bring it fully into production. Just as productivity is important in explaining differences in land rent, so, too, is location. Other things equal, business renters will pay more for a unit of land which is strategically located with respect to materials, labour, and customers than for a unit of land that is remote from the markets. Witness the extremely higher land rents in large metropolitan areas. And witness the difference in the cost of a scenic house lot in Carmel, California, which is close to heavily populated. San Francisco, versus a similar parcel in hot, muggy and remote rural Mississippi. Now, some final points about land and rent, before we move on to our next factor of production, labor. First, although rising economic rents do not increase the quantity of land supply, rents do have a certain economic function. In particular, rents serve to allocate a scarce factor among competing uses. More importantly, the most valuable use will determine the market rent. For example, did you know that much of land in New York city was once used for pasture crops? However, over time, the rising price of land drove the fixed costs of farming so high that farmers could no longer make a profit in Manhattan. These farmers were initially replaced by modest homes, rooming houses, and factories, and ultimately by sky-scraping office buildings. Each step in this evolutionary process was propelled, in part, by increasing rents. Farms and individuals with more valuable uses for the scarce land offered increasingly high prices for its use. In turn, the high rents forced others to move their farms or households to other locations. Accordingly, the most valuable use of land will be determined by the market rent. Second, the concept of rents has been extended by economists to include any payment to a factor resource above its opportunity cost. That is, above the amount it would receive in its next best use. This notion of Quasi-rents is illustrated in this figure. In this example, an individual represented by point A on the supply curve would be willing to supply the good at S nod, but the market equilibrium is P nod. The difference P nod minus S nod/ is his or her Quasi-rent. In fact, as we shall discuss further when we get to the labour market, this quasi-rent situation looks a lot like the market for superstars. The demand for these performers is very high, because they can generate substantial revenues for their musical, comedic, and athletic talents. However, the salaries these superstars command are significantly above the salaries they might earn in their next best job. By the way, if this point is still not clear, just remember when Michael Jordan tried to play baseball, he not only couldn't hit a curve ball, he earned a small fraction of his basketball salary. Third, and related to our second point, the broadened definition of rent has led economists to the insight that if individuals could somehow restrict the supply of a factor, the rent they could receive for the factor would be higher. Rent seeking is the name given to the restricting of supply in order to increase the price suppliers receive. Put another way, rent seeking is an attempt to create either ownership rights or institutional structures that favour you. If this sounds a little abstract, you can think about it this way. Suppose you are the chairman of General Motors, and you're facing stiff competition from Toyota of Japan. One solution is to become a more efficient producer. However, an alternative solution is to use the company's political clout to lobby the congress to impose a tariff or quota on Japanese auto imports. This would be an example of rent seeking by a special-interest group in our economy. Well, that concludes our discussion of the land market. In the next lesson, we will look more closely at how labour unions influence wages, and more broadly at how wages are determined in the labour market. In the meantime, please remember that economics is not something to be memorized but rather something to conceptualize. As you study it, think about it too, your job and your business might just depend on it. 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